By Jean-Philippe Turgeon and Guillaume Synnott
On April 15, 2015, in a unanimous decision, the Quebec Court of Appeal issued an important judgment pertaining to a franchisor’s duty to act in good faith and its related, implied obligations toward its franchisees. Confirming the earlier trial court judgment, the court of appeal ordered Dunkin’ Brands to pay nearly $11 million—plus interests and costs, for a total of nearly $18 million—to a group of Quebec Dunkin’ Donuts franchisees for lost investments and profits.
The court found the franchise agreements between Dunkin’ Brands and its franchisees included both explicit and implied obligations for the franchisor to provide continuous collaboration and support that the franchisees legitimately expected, to protect and enhance the brand, maintain high and uniform standards within the franchise system and, generally, preserve the integrity of the franchise system as a whole.
By June 15, the franchisor availed itself of its right to apply for leave of appeal before the Supreme Court of Canada.
A long legal saga
Up until the mid-1990s, Dunkin’ Donuts was a leader in the fast-food industry in Quebec, with more than 200 stores across the province. Its fortunes declined, however, when Tim Hortons—which was also in the quick-service coffee and donut market—started asserting its presence in Quebec.
During a meeting convened in 1996 in response to this new level of competition, Dunkin’ Donuts franchisees complained about insufficient support from their franchisor (i.e. Dunkin’ Brands), along with an inappropriate tolerance of underperforming franchisees. Facing a worsened situation in early 2000, a group of these franchisees wrote a formal letter reiterating their concerns and complaining about a breach of the franchisor’s obligations toward them, including the failure to invest the required money, time and resources as were appropriate to protect and increase the brand’s image and value in Quebec.
The key feature of Dunkin’ Brands’ response was a renovation program, under which franchisees who would commit to invest $200,000 to renovate their restaurant and comply with some other conditions would in return receive a $46,000 subsidy from the franchisor. This plan proved unsuccessful, however, as the renovations did little to stave off the increasing threat of competition from Tim Hortons.
By 2003, Dunkin’ Donuts’ market share in Quebec had plummeted to 4.6 per cent from its peak of 12.5 per cent in 1995. Tim Hortons captured the lion’s share of the province’s growth in the coffee and donut fast-food market, increasing from 60 stores in the province in 1995 to 308 by 2005.
In May 2003, a group of 21 Dunkin’ Donuts franchisees operating 32 locations filed a lawsuit against their franchisor claiming, among others things, damages for breach of contract. Their legal proceedings alleged the franchisor had failed to meet its contractual obligations to adequately protect and enhance the Dunkin’ Donuts brand in Quebec.
The trial lasted 72 days spread across three years (2010 to 2012). The judge of the Superior Court of Quebec agreed with the franchisees and, in June 2012, awarded damages totalling $16.4 million to them for lost investments and lost profits under their franchise agreements.
In April’s decision, while the court of appeal agreed with the trial judge—finding the terms of the franchise agreements both expressly and implicitly imposed an obligation for the franchisor to protect and enhance the brand in Quebec—it reduced the total award to $10.9 million, plus costs and interests.
This case outlines key elements to be considered by franchisors in fostering the infrastructure of their franchise systems and establishing a collaborative relationship with their franchisees.